Australians are increasingly at risk of making the wrong decisions in crucial areas such as superannuation investments because of poor levels of financial literacy, according to a leading researching in the University of Sydney Business School.
Professor Susan Thorp says that while most Australians are coping, fewer than half can answer basic questions related to interest rates, inflation and the diversification of risky assets and are therefore highly vulnerable.
“If you are going to manage your credit card you need to understand interest rates or you need to understand how inflation might affect the spending power of your wages and you need to understand risk if you are going to manage your superannuation investments,” says Professor Thorp.
“What we see is that people who have poor skills in this area are much less likely to have prepared for their retirement,” she said. “They are likely to have found these decisions difficult and alienating and they don’t want to think about it.”
“People are dealing with increasingly complex decisions sometimes involving very large sums of money without understanding the basics such as compound interest,” she adds. “By any objective measure many lack vital financial skills.”
Professor Thorp, who joined the Business School’s Finance Discipline this year, was recently appointed to an Organisation of Economic Cooperation and Development (OECD) research committee on financial literacy.
The 34 member OECD says that while a complex financial landscape has evolved rapidly since the global financial crisis, the ability of regulation alone to effectively protect consumers has remained limited.
According to the OECD, the financial crisis demonstrated the negative effects of “low levels of financial literacy for society at large, financial markets and households”. As a result, it says financial literacy has become a long-term policy priority in many countries.
In a effort to assist, the OECD has joined with the International Network on Financial Education (INFE) to improve financial literacy levels worldwide. The OECD/INFE will be advised by an academic committee focusing on the “synergies between research and policy development”.
Professor Thorp says the committee will work to “broaden and deepen” research into financial education to ensure “more effective and measurable outcomes” in this area.
“There are financial literacy programs being delivered all over the world. ASIC is funding literacy programs here in Australia. As an academic research committee, our role will be to help to make these programs as effective as possible,” said Professor Thorp.
The 13 member research committee is made up of financial literacy experts drawn from the world’s leading universities.
Professor Thorp says that the key to developing financial literacy is adequate numeracy skills. “You need to help students when they are at school to get a good foundation in mathematics and feel confident with numbers,” she concludes. “Secondly, financial institutions and financial regulators must support adults who are making difficult decisions.”
Source: University of Sydney
